From Bloomberg: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKdo.y7rr1ys&pos=3

By Martin Z. Braun and William Selway

Published: November 4, 2009

Nov. 4 (Bloomberg) — JPMorgan Chase & Co. agreed to a $722 million settlement with the U.S. Securities and Exchange Commission to end a probe into sales of derivatives that helped push Alabama’s most populous county to the brink of bankruptcy.

JPMorgan will give Jefferson County, Alabama, $50 million, pay a $25 million penalty and cancel $647 million in fees the county faced to unwind the transactions, according to an SEC news release. In addition, the agency charged two former JPMorgan employees for their roles in an “unlawful payment scheme” that allowed them to win bond and interest-rate swap business with the county.

The settlement comes a week after Larry Langford, the former president of the Jefferson County Commission and Birmingham mayor, was convicted for accepting $235,000 in designer clothes, Rolex watches and cash from an Alabama banker who JPMorgan paid almost $3 million to help arrange the swaps associated with a refinancing of the county’s sewer debt.

“It’s a good day for us,” said Jefferson County Commission President Bettye Fine Collins. “Finally, we’re seeing some movement. We have been victimized by our creditors.”

Jefferson County, which includes Birmingham, the state’s largest city with more than 240,000 residents, has faced bankruptcy since February 2008, when a $3 billion refinancing of its sewer system collapsed during the credit crisis. JPMorgan was the lead banker on those transactions, which are the subject of the SEC’s complaint.

SEC Allegations

The SEC alleged that JPMorgan, Charles LeCroy, the banker who pitched the refinancing to Jefferson County, and Douglas MacFaddin, the former head of the New York-based bank’s municipal derivatives desk, made more than $8 million in undisclosed payments to close friends of county commissioners. The associates owned or worked at local-broker dealer firms that didn’t do any work on the deals, the SEC said.

In exchange, the county commissioners voted to select JPMorgan to underwrite the floating-rate sewer bond deals and provide interest-rate swaps, which were meant to lower the county’s borrowing costs, the SEC said. JPMorgan passed along the costs of the illegal payments by charging higher interest rates on the swaps, the SEC said.

“This self-serving strategy of paying hefty secret fees to local firms with ties to county commissioners assured JPMorgan Securities the largest municipal auction rate securities and swap agreement transactions in its history,” said Glenn Gordon, associate director of the SEC’s Miami office, said in a statement.

Acted Properly

Richard Lawler, a lawyer for MacFaddin, said his client didn’t break the law, though he said he hasn’t had time to fully review the SEC complaint. Lisa Mathewson, LeCroy’s attorney didn’t immediately return a call for comment.

“Mr. MacFaddin has at all times acted properly in his dealings with the Jefferson County Commission,” Lawler said. “We are confident he will be vindicated after trial.”

The county paid JPMorgan and a group of banks $120.2 million in fees for $5.8 billion of derivatives, according to a series of stories published by Bloomberg News in 2005. The payments were about $100 million more than they should have been based on prevailing rates, according to estimates in 2007 by James White, an adviser the county hired after the SEC said it was investigating the deals.

Derivatives are financial instruments linked to stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather.

CDR Indicted

CDR Financial Products, the firm that advised the county on the swaps, was indicted last week for alleged bid-rigging and other anticompetitive practices involving municipal derivatives as a result of a separate investigation.

“JPMorgan is pleased to have reached a settlement with the SEC in connection with its investigation of Jefferson County,’ said JPMorgan spokesman Brian Marchiony in a statement.

The bank concluded the case without admitting or denying the allegations. LeCroy, 55, and MacFaddin, 48, didn’t agree to settle.

JPMorgan’s plan to pay politically connected firms to win the financing business from the Jefferson County commission began in 2002, according to the complaint. JPMorgan banker Charles LeCroy told his bosses they would pay $5,000 to $25,000 to Mobile, Alabama-based Gardnyr Michael Capital Inc. and ABI Capital Management, which both can be ‘‘helpful to us in Jefferson.” Neither was charged in the SEC complaint.

Millions of Dollars

The undisclosed sums paid to well-connected firms wound up running into the millions of dollars, according to the SEC. In July 2002, LeCroy told MacFaddin about how his plan paid off for the bank, which was selected that month to lead a $1.4 billion bond deal.

According to LeCroy, Commissioner Jeff Germany and another unnamed commissioner told him JPMorgan would “have to take care of our two firms” in return for their support. The composition of the Jefferson County commission was poised to change in November. Germany was convicted of misusing public funds in a separate case.

“I said, ‘Whatever you want — if that’s what you need, that’s what you get, just tell us how much,” according to the complaint, which cites tape recordings of the conversation. “They want it done before they lose control, because they want to help all their friends.”

Explaining Payments

The complaint shows that MacFaddin and LeCroy struggled to explain the payments. After Gardnry Michael submitted a $250,000 invoice to JPMorgan in October 2002, the two considered describing the firm as an adviser to JPMorgan.

“But in the end, he really didn’t advise us on the swap _ or the structure _ or anything like that,” MacFaddin told LeCroy. “What we’re saying is, it’s really Jeff Germany who is directing us to pay these guys. It’s not, we’re not paying them because they were our adviser.”

This isn’t the first time LeCroy faces allegations of making payments to politically connected firms to win work. In January 2005, he pleaded guilty in a federal corruption investigation in Philadelphia involving city bond business steered to political supporters of former Mayor John F. Street.

New York-based JPMorgan, which disbanded the unit selling debt derivatives to municipalities in September 2008, is the first Wall Street bank regulators probed for the sale of unregulated contracts such as interest-rate swaps to states and local governments.

At least seven of the New York-based firm’s bankers are under scrutiny in a Justice Department criminal antitrust investigation of the sale of unregulated derivatives to local governments across the U.S., federal regulatory records show.